Seeing eye to eye

In my post the other day, about the progress of our latest effort at competition law reform, I noted that the Select Committee dealing with it had reported unanimously supporting a range of law amendments, but apparently not unanimously supporting the overall Bill. 

Turns out that in fact the committee was unanimous about the Bill and the initial statement that it had been passed "by majority" was a mistake by the Committee. Last Thursday it updated the record here and now says: 

"In our final report to the House, we recommended, by majority, that the bill be passed, with all amendments recommended unanimously. This was incorrectly recorded and does not accurately reflect the committee’s resolutions. We wish to correct our recommendation to the following:

The Economic Development, Science and Innovation Committee has examined the Commerce (Promoting Competition and Other Matters) Amendment Bill and recommends that it be passed. We recommend all amendments unanimously".

At one level this is all just technical detail. More substantively, however, it does raise the probability that the unanimous view of the Committee will in fact carry through to the final form of the legislation.

The shape of things to come?

Last month the Economic Development, Science and Innovation Select Committee produced its report on the Commerce (Promoting Competition and Other Matters) Amendment Bill, which "amends the Commerce Act 1986 to modernise and strengthen competition settings". The marked-up Bill from the Committee, incorporating its report, can be found here. 

In principle the recommendations could be over-ridden by the whole House, and I frankly don't know how often that happens. But my guess is that given that the recommendations were unanimous, a complete overhaul is rather unlikely (that said, the Committee recommended "by majority" rather than unanimously that the Bill be passed, so I may be overdoing the degree of political harmony). In all likelihood, though, I think we have a decent steer on what the ultimate Act will look like.

By and large the Committee endorsed the thrust of the Bill as it stood, though it made a substantial number of amendments to various proposed sections. Only two elements of the Bill were thrown overboard: the proposal to allow the Commerce Commission to carry out market studies of pro-competitive regulation, and the proposal to repeal s46 of the current Act.

Giving the heave-ho to pro-competition market studies wasn't because the Committee didn't like the idea, but rather because it reckoned the existing market studies power in Part 3A of the Act already allows the Commission to do them. And just to be totally clear about it, it proposed incorporating, after the existing s51B(3), a new subsection 3A, "To avoid doubt, the [market study] recommendations may, without limitation, be made for the purpose of (a) reducing regulatory barriers to competition; or (b) the development of regulation to promote competition".

Junking the unnecessary new kind of market study power also dealt to one of its more questionable elements. Originally the Bill would have allowed the Commission to require third parties "(a) to prepare and produce forecasts, forward plans, or other information and provide them to the Commission; and (b) to apply any methodology specified by the Commission in the preparation of forecasts, forward plans, or other information". The Committee didn't like the sound of that, and neither had I in my submission: the Committee asked me about it in my Zoom session. In the end the Committee said that "Some submitters opposed enabling the Commission to compel parties to create new information, such as forecasts, describing it as overly intrusive and inconsistent with established disclosure principles. We are also concerned that this proposed information-gathering power may not be justified".

The other proposal to get the chop was repeal of s46. In the Committee's own words, "Section 46 is one of a number of provisions that provide for exceptions to the application of Part 2 of the Act (Restrictive trade practices). It draws a bright-line boundary by providing that acquisitions of assets of a business or shares are dealt with through the merger regime in Part 3 (Business acquisitions) rather than also being able to be challenged under Part 2 ... A number of submitters argued that repeal of section 46 would expose ordinary merger activity to Part 2 scrutiny, chilling legitimate commercial activity. We recognise that submitters value a clear and statutory boundary. We therefore recommend deleting clause 8 of the bill, to retain section 46".

Otherwise the proposed changes went through, albeit with some amendments. Here are my personal highlights.

There will be a new statutory notification regime to better support collaboration between businesses, and along similar lines the Commerce Commission will be able to grant class exemptions for categories of low-risk conduct, staring with collective bargaining by small firms (the Committee set $3 million in annual revenue per firm as the 'small' criterion) and retail price maintenance. 

The Bill proposes introducing corrective action orders for contravention of Part 2 of the Act (restrictive trade practices). I couldn't agree more. As I said in my submission (p3), "This is a splendid idea and frankly I’m surprised that we all hadn’t thought of it long ago. Fines (the current penalty) are a deterrent and a punishment, but I’m perfectly sure that what consumers would value most is a putting right of the rort they were exposed to". The Committee clarified that private parties, and not just the Commission, will be able to apply for these orders.

The merger control regime is being beefed up in a number of significant ways. 

While there will still be a voluntary merger notification system, the Commission will (if it hears of one) be able to "call in" a merger that might be of concern, and require the parties to suspend it and to hold the businesses separate for 40 working days. 

The concern over "killer" acquisitions - allegedly buying out prospective competitors before they become a real issue for incumbents - is addressed by expanding the definition of a post-merger "substantial lessening of competition" (SLC) to include "creating, strengthening, or entrenching a substantial degree of market power" (I'd guess the 'strengthening' and, especially, 'entrenching' limbs will be doing the heavy lifting). This new SLC definition is in play only for the merger bits of the Act: the Committee said that "We consider that applying the clarification across the Commerce Act [as a whole] may create uncertainty about legitimate competitive responses, because such conduct could be framed as "strengthening" or "entrenching” a firm’s position".

And the concern about "creeping acquisitions" - allegedly where an incumbent quietly hoovers up market influence in successive bite-sized chunks - is addressed by allowing the Commission to look at a new merger in the context of acquisitions over the past three years, and not just from a standalone perspective. The Committee clarified that they can't be any old acquisitions but must involve "the same, substitutable, or otherwise competitive goods or services".

All of these changes can be seen as a toughening up of the merger regime, to prevent anti-competitive mergers sneaking through the cracks. But there was one recommendation that can be thought of as a liberalisation, and that's the proposal to allow the Commission to accept "behavioural undertakings" as part of a merger approval. 

For those new to it, currently (from my submission, p2), "s69A [of the Commerce Act] allows the Commission to accept only one kind of undertaking from an applicant for a merger clearance or authorisation – an undertaking "to dispose of assets or shares specified in the undertaking", i.e. a promise to divest some assets so that a post-merger competitor can acquire them and act as a more effective competitive constraint on the merged entity. The Commission is specifically forbidden in s69A(2) from accepting any other kind of undertaking, even if some other kind of behavioural, rather than divestment, undertaking would solve any competition issues".

"This", I concluded (and a fair few of the folks in the competition game have the same view), "doesn’t make a lot of sense, and isn’t standard international practice". So behavioural undertakings will now be acceptable in principle, and the scope for the Commission to accept them has been widened a bit. They could kick in where, for example, divestments of the scale needed to address competition concerns are simply not reasonably practicable.

And finally there's predatory pricing. which is proposed as a new s36C of the Act and which involves anyone with market power "(a) pricing below Average Variable Cost or Average Avoidable Cost (b) pricing above Average Variable Cost or Average Avoidable Cost but below Long-run Average Incremental Cost or Average Total Cost if the pricing is for an exclusionary purpose", with all these cost  terms defined in the proposed Act. 

I can see why this has been proposed: I'm still ambivalent about its necessity or practicability. We'll see. In any event it may crop up again: the Labour and Green members of the Committee, in a "differing view" at the end of the report, said that "The proposed use of long run average cost as an objective benchmark was consistent with established international competition practice and would have been a small step forward". I read that as saying they would have preferred a cost test that would have led to more prices being found predatory, but if predatory pricing is your main thing, maybe you should read Russell McVeigh's commentary on the Committee's report as they see it as reflecting some debate within the committee about whether to go with predatory pricing or not. 

Those members would also have liked to have seen industry-specific codes of practice brought in - so would I - and also wanted to see "amendments ... that would have provided contractors initiating collective bargaining with a safe harbour from retaliatory conduct by contractees, despite concerns raised during submissions that without such protections the right to collectively bargain may exist in theory but not in practice". So while we are undoubtedly nearer the end of our lengthy and rather slow competition reform journey, there's probably a bit more change still to come.

Unexpectedly critical

This week's Performance Improvement Review (PIR) of the Treasury took me aback. 

I've met many people from Treasury over the years in various contexts, and have a high opinion of them. And while I was aware that in recent years hiring had appeared to downgrade the importance of bringing professional economists on board, in favour of some sort of 'broadening perspective' or 'flexibility' approach, I hadn't noticed any drop-off in quality in the Treasury people I've personally encountered. In some areas I thought Treasury had actually upped its game, notably in starting to engage more with the public about our various fiscal and productivity challenges.

But the PIR told a different story about Treasury as an institution. Despite good work in some areas - including the "public engagement to raise awareness of New Zealand’s long-term fiscal challenges" that I'd noticed for myself - "Nevertheless, the consensus of stakeholders interviewed is that the Treasury’s performance has not consistently met expectations in recent years" (p5).

Here are some examples.

The PIR included ratings of Treasury, across 23 different dimensions, on how prepared it is to up its game (p31). There wasn't a single 'Leading' (the top rating). There were six 'Embedding' (loosely, Good). But by far the most common rating was 'Developing' (loosely, Middling/Adequate), with 16. And there was one outright 'Weak', which, worryingly, was for its effectiveness at one of its core functions, providing economic policy advice. 

And then there was this remarkable level of turnover (the chart below is from p65) - high in outright terms and, significantly, relative to the wider public sector. How could it do well when in the worst year Treasury was having to replace a third of its staff? With people voting so strongly with their feet you have to wonder about both staff management and the longer-term impacts of Treasury's recruitment focus. As the PIR found, "Historically, the Treasury was widely regarded as a high-profile training ground for public sector leaders. Interviewees described it as “the gate you had to get through” and “a real place of debate and challenge that the brightest and best went to”. That is no longer the common perception. Many interviewees questioned how the Treasury could reestablish itself as an employer of choice in a more competitive labour market" (p61).

Recent recruitment, whatever it was meant to achieve, hasn't turned out well. The PIR found (p62) that "A strong theme from interviewees was concern that the Treasury has lost specialist expertise. While the Treasury is aiming for a flexible and agile workforce, external stakeholders in particular were concerned that flexibility and generalism are not yet balanced strongly enough with the depth needed in key areas, pointing to the loss of “wise owls” and thinning commercial and economic depth. Internal interviews reflected this more indirectly, highlighting capability pressure, key-person risk, and the need to rebuild depth in selected areas". In passing I'd note the recurrent criticism of the UK's Treasury, that it over-relies on clever generalists with no subject matter expertise, further aggravated by too-early rotation out of roles which people had just got comfortable with. 

One final and rather sad pair of points. Treasury has a system role in the public sector: it's where agencies go for specialist advice on how best to run their organisations. But Treasury isn't eating its own cooking. When it comes to performance reporting (p57), "The Treasury’s performance and accountability system is still developing and is not yet strong enough to drive improvement or provide clear assurance about results ... In that context, the Treasury is expected to model a coherent and credible approach to performance and accountability itself". The same applied to strategic planning (p50): "The Treasury provides guidance to departments on Strategic Intentions as part of the Public Finance Act performance reporting framework, and would be better placed if it more clearly modelled the clarity it expects from others".

There are pluses. The Treasury Secretary made a brave and useful call to have a PIR team come in. The PIR itself has come up with what look from the outside like plausible diagnoses and has produced a comprehensive list of sensible recommendations (pp6-8 and repeated as Appendix 1, pp73-5). And Treasury itself showed some self-awareness and had already got the ball rolling in the right direction with its own internal change programme.

The PIR didn't prioritise its recommendations, and maybe it's right to try and move ahead on all fronts, but for my money I'd particularly like to see the Recommendation 3 bullet points addressed early in the piece. They're about enhancing the impact of Treasury's economic policy advice. 

For one, that's the area rated worst at the moment. And for another, we're never going to get a lot of economic progress if an important national direction setter isn't pulling its weight. It's a bit strange, for example, that although we've been talking about New Zealand's low productivity growth for decades, we're still at the stage of a recommendation to "Refresh the Treasury’s diagnosis for unlocking higher rates of productivity growth (e.g. integrating the potential of AI) and maintain a set of actionable ideas grounded in commercial realities for engagement with Ministers as opportunity presents". 

Memo to whoever is the next Opposition finance spokesperson: diarise a Parliamentary Question for a year's time and let's find out if we're getting the policy impact progress the PIR and the rest of us want to see.

The other shoe drops

This week's second batch of competition policy reforms, announced jointly by Finance Minister Nicola Willis and Commerce and Consumer Affairs Minister Scott Simpson, was welcome from any number of perspectives. The press announcement is here, there's a useful fact sheet here, and if you missed the first batch I wrote about them here. If you're an irremediable policy tragic, you'll find the Cabinet paper supporting the latest reforms here.

For a start, on the substance, they've made almost all the right calls. 

On mergers, the reforms will amend the definition of "substantial lessening of competition" to extend to "conduct that creates, strengthens, or entrenches a substantial degree of power in a market" (I'm quoting para 19 of the Cabinet paper), which not only helps make it explicit that 'killer' acquisitions are in the frame but also harmonises with Australia's approach. 'Creeping' acquisitions - individually apparently insignificant purchases that cumulatively build up to a degree of market power - also got attention. It appears that it wasn't clear that the Commission could look back at the past track record when considering the latest in a series, but in future it will be able to take the evidence of the previous three years into the balancing act, with the proviso (para 24) that "The Commission will not have new powers to unwind past acquisitions, nor will it affect its existing ability to take action where a past acquisition was independently unlawful".

Importantly, the Commission will now be able to accept behavioural undertakings as part of a merger approval. For no obviously compelling reason, "The Commission currently lacks the authority to accept voluntary behavioural undertakings from merging firms (other than in relation to the disposal of assets or shares). These undertakings are commitments proposed by merging firms about their future conduct and are commonly used overseas, including in Australia and the United Kingdom, to resolve competition issues while preserving potential merger benefits. Feedback from public consultation, especially from the business and legal communities, showed strong support for allowing the Commission to accept these undertakings' (para 28). As a result, "The current gap in the merger regime may lead to the rejection of mergers that could otherwise be cleared with appropriate behavioural remedies, resulting in missed opportunities for efficiencies and consumer benefits" (para 29). It will mostly be up to merger applicants to suggest them, and up to the Commission to accept or reject them (or, I'd guess, have a bit of to and fro).

Whether there are swathes of anti-competitive mergers occurring that haven't been voluntarily notified to the Commission is debatable - New Zealand's a small place, word gets round, and the Commission can read the newspapers - but in any event the Commission is getting two new powers to help cope with any that come along. There'll be "a targeted “stay and hold” power to suspend the completion of a potentially anti-competitive merger for up to 40 working days. This would allow time to assess competition risks before the transaction is completed" (para 33) and "a targeted “call-in” power to require parties to seek clearance if the Commission considers the transaction may substantially lessen competition. This notice would pause the transaction until clearance is granted, declined, or the process is terminated" (para 34). Sensibly, the reforms shied away from a mandatory merger reporting regime.

The Cabinet paper also strongly suggests that the current government is deeply averse to any more single-sector regulation. "Previous governments have responded to competition challenges by introducing repeated sector-specific regulation. Strengthening New Zealand’s overall competition framework will better equip the Commission to address markets with high barriers to entry and expansion, reducing the need for repeated sectoral regulation, such as the Grocery Industry Competition Act 2023 and the Fuel Industry Act 2020. These interventions involved lengthy policy and legislative development processes and have not always delivered the broader, enduring improvements to market dynamics that a more robust and flexible competition regime could achieve" (para 9). Looking, for example, at the data on petrol importer margins (available here), you'd be tempted to agree.

Making the Commerce Act more effective across the board is one answer: in addition, the Commission will get powers to deploy a local version of Australia's industry codes*. "We propose creating a power to make targeted regulations to guide conduct among market participants to break down barriers to entry and expansion" (para 41). The Commission can only regulate when "the market in question is concentrated, whereby market power is held by only a small number of firms; there are barriers to entry and expansion; the market is not working well for consumers, and the proposed rules are consistent with the purpose of the Act" (para 44, slightly abridged). 

Personally I think the further requirement that Cabinet signs off on any Commission-initiated regulatory codes is a step too far. The stated justification is "To ensure this power is used proportionately and only as a last resort" (para 44), and maybe there is a case that democratically accountable representatives ought to sign off on non-elected technocrats getting too heavyhandedly involved in bossing entire industries around. I've noticed, too, when presenting to Select Committees, that some MPs evidently have a fear that an overzealous Commission might go feral. To me, though, it's another example of successive governments' fetish for costly micromanagement: far too many things already have to go to Ministers or Cabinet, and this doesn't need to be yet another one. MBIE, when preparing the regulatory impact statement for these reforms, looked at an 'Option 3': "Commission-issued pro-competition rules – Allows the Commission to develop and implement rules independently, without separate Cabinet approval each time". That was a path not taken, but should have been, and in the fulness of time I'll likely front up to a Select Committee and argue for it.

And then there's predatory pricing. "Allegations of predatory pricing have arisen in the aviation, grocery and building supplies sectors, but enforcement remains challenging. Part of the challenge is the lack of clarity around the circumstances when prices are so low that they breach competition law" (para 51). So the reforms suggest some pricing tests that could more effectively ping predatory pricing under s36 of the Act: "Pricing below Average Variable Cost (AVC) or Average Avoidable Cost (AAC) over a sustained period is presumptively unlawful", and "Pricing above AVC/AAC but below Long-Run Average Incremental Cost (the average cost of producing an additional unit of output over the long-term**) or Average Total Cost (total costs divided by the number of units produced) over a sustained period is presumptively unlawful only where there is evidence of exclusionary intent" (para 53), with some sensible carve-outs: "short-term promotional pricing, including one-off specials, de minimis discounts, or mistaken pricing, are not captured unless part of a sustained pattern of pricing behaviour" (para 55). I have to say, I'd like to have been a fly on the Cabinet room wall when Ministers were confronted with 'Long-Run Average Incremental Cost' ...

Gibes aside, the reform's heart is in the right place, and maybe it'll reduce the scope for judges to see vigorous incumbent reaction to competition rather than strategic deterrence of rivals (yes, I'm thinking of Pink Batts***), but we'll see. As anyone who has been up close and personal with a s36 case knows, it's hard to magick away the complexities. 

There's other good stuff which I'll leave you to explore, but I'd like to add a few words about process.

By recent New Zealand competition policy standards, this has been a quick and effective exercise. While there was a bit of a gap between consultation closing (early February) and the first package of reforms (mid August), and the contents of the first tranche were distinctly modest compared to the range of topics consulted on, the Minister promised that "Further decisions on the merger regime, potential new industry codes, and other changes will be announced over the coming weeks". He - and Nicola Willis - have very largely delivered, though the odd issue, like 'concerted practices', appears to have fallen into a void. 

And between them they had the heft of being able to get an early slot in the always crowded legislative queue: "We propose that the policy outlined in this paper be given effect through the Commerce (Promoting Competition and Other Matters) Amendment Bill, which is at priority category 5 (to proceed to Select Committee by the end of 2025)", which likely means enactment in 2026. Good stuff all round: it's nice to see effective competition being given the priority it deserves. And while I'm in a generous mood, a hat tip too to whoever held the pen on the Cabinet paper: these are complicated issues, and whoever wrote them up did a fine job of making them clear. 

*Update (September 30) - I didn't spot it but in the event Cabinet actually decided not to endorse the industry code idea. See today's post.

**I've deleted an apparently superfluous 'costs' here

***Carter Holt Harvey Building Products Group Limited v Commerce Commission [2004] UKPC 37

It's a start

Last week's competition policy announcements by Scott Simpson, the Minister for Commerce and Consumer Affairs, were some modest steps in the right direction (and a nice little coup for the Competition Law and Policy Institute of New Zealand's annual workshop, where he made the speech).

He was surely right to make it easier for businesses to collaborate where there are likely to be net consumer benefits, given that the Commerce Commission's current authorisation process is "too complex, costly, and slow for business". Authorisation as it is currently practised isn't so much like using a sledgehammer to crack the proverbial nut: it's more like commissioning a squadron of war elephants to trample on it for months.

He also said that "We have also heard in your submissions" - the ones in response to MBIE's turn of the year consultation on 'Seeking feedback to improve competition in New Zealand' - "that businesses and individuals are increasingly reluctant to share information with the Commission because of fears confidential information could be released under the Official Information Act, potentially leading to retaliation or misuse of confidential information by competitors. This is undermining the Commission’s ability to collect evidence and receive useful information, particularly in investigations and merger clearances".

This is something that has been rumbling for a while, and he's done something about it. I can't say that I warm to one of his solutions, to exempt information provided to the Commission from the ambit of the OIA for 10 years, as I reckon we could do with less whiteanting of the Act,  but I suppose it will do the job in its way, and the other proposals (more flexible confidentiality orders, and whistleblower protection) look good ideas.

If I can be grumpy for a moment, I'd like to observe that this concern for confidentiality wasn't so obviously to the fore the last time Parliament looked at the Commerce Act, when in 2021 it introduced s99AA to allow the Commission to share information with "a public service agency, a statutory entity, the Reserve Bank of New Zealand, or the New Zealand Police", contrary to my elegant and well reasoned submission.

What struck me otherwise about the Minister's announcements was how much was still to come. The MBIE consultation was open-ended, but included a questionnaire (which many of us filled in) indicating what they most wanted to hear about. They included "the effectiveness of the current merger regime"; how to deal with "creeping acquisitions" and entrenchment of market power, for example, through 'killer' acquisitions of nascent competitors; whether to align our approach to mergers with the Aussies'; and a big question asking "How effective do you consider the current merger regime is in balancing the risk of not enough versus too much intervention in markets?". MBIE wanted to know whether potentially non-competitive mergers that were not notified to the Commission are an issue, and whether the Commission might need extra powers to deal with them (such as a stay or hold separate power). And MBIE wanted to know whether the Commission should be able to accept behavioural undertakings as part of a merger approval.

Outside mergers, MBIE also wanted to gather views about potential anti-competitive 'concerted practices' and what to do about them, and what role industry codes or rules might play in bolstering the competition regime. And then there were various rats and mice, including whether the Commission's injunction powers need modernising, views on assorted technical and minor amendments, and an open-ended "what else have you got to say".

So it would be fair to say that - six months after consultation closed - the announcements last week dealt to only two of the 11 broad topic areas MBIE canvassed: we've had some baubles, but no Christmas tree. The Minister said that "Further decisions on the merger regime, potential new industry codes, and other changes will be announced over the coming weeks". Given that we've been on the slow side in recent years when it comes to competition policy reform, compared with the Aussies in particular, a quick policy timeframe is good to hear.

Too slow? I don't think so

Ignoring the predictably partisan knee-jerk assessments from the usual suspects, there were two broad camps of reaction to yesterday's Budget. 

One was that it didn't actually do enough to boost growth, its signature objective. The accelerated investment incentive is fine, especially given that part of our productivity problem relates to New Zealanders working with less capital equipment than their counterparts overseas, but it's having to do a lot of work on its own. Yes, there were other Budget things that will help (notably increased spending on infrastructure) but overall it didn't deliver an adequate pro-growth punch.

The other reaction, from what you might term the fiscal 'hawks', was that it didn't move fast enough to close the fiscal deficit. It's easy to ramp up public spending, run deficits, and borrow, but quite a lot harder to cut back, get the books into surplus, and pay back some of the debt: there's a ratcheting effect where public spending boosts tend to be larger than any subsequent windbacks. Retrenching this time round hasn't got any easier: on the Budget projections there's only a minuscule surplus in the fiscal year to June '29, and even if we get there (and a $0.2 billion surplus is well within any margin of measurement or forecasting error) that's still four years away. 

There was probably no way Nicola Willis was going to simultaneously satisfy both the pro-growth and pro-windback camps, and I think it's fair to say that both are far from gruntled.

My own reaction is that, while I'm sympathetic to the general point that we need to rebuild the fiscal books, I think Willis is doing it at what, in current circumstances, is a sensible pace, and the more rabid fiscal hawks should back off.

Why do I think that? Let's look at the 'fiscal impulse' - whether fiscal policy in any year has become more expansionary or contractionary compared to the previous year*. This year I was somewhat concerned that an over-hawkish drive to an eventual fiscal surplus might be too aggressive, and risk further damaging an economy that is still in a somewhat fragile state. I also wanted to see whether fiscal policy was playing nicely with monetary policy: as the RBNZ said at its latest OCR review, there are "downside risks to the outlook for economic activity and inflation in New Zealand", and it wouldn't be the best of ideas to have fiscal policy braking the economy too hard.

Here's what the fiscal impulse looks like (from p67 of the Budget Economic and Fiscal Update, the 'BEFU'). Bottom line, the pace of withdrawing fiscal support looks pretty sensible to me. According to the BEFU forecasts, GDP growth in the current fiscal year to June '25 will have fallen by somewhere between 0.3% (expenditure measure of GDP) and 0.8% (output measure). and by a stonking 1.9% in per capita terms. In those circumstances what has turned out to be a modest fiscal boost makes complete sense.

For the year to June '26, there's a marginal fiscal boost which is macroeconomically speaking irrelevant, and even if it were a bit larger, it mightn't be such a bad idea given the uncertainty around the economic outlook. And then there are three years of moderate but meaningful windback of fiscal policy. You may have your own views, but I can live with that. 

In passing, there were a couple of initiatives in the minutiae of the Budget that I particularly warmed to. If you're interested in exactly what new stuff is planned, by the way, the place to go is the 'Summary of Initiatives' document.

Statistics New Zealand is getting $63.8 million over the next four years which "provides funding held in contingency to deliver eight updated macroeconomic measures by the end of 2030, to meet new international standards and better measure changes in the economy. Funding will also deliver new monthly indicators by 2027 to provide timely updates on economic activity", and another $16.5 million to "deliver a more frequent, reliable measure of inflation by moving from quarterly to monthly Consumers Price Index (CPI) reporting. Data will be collected on a monthly rather than quarterly basis, with regular monthly CPI reporting delivered from the beginning of 2027". We've been falling behind other OECD countries (and indeed behind some poorer non-OECD economies) in terms of the timeliness and range of our macroeconomic data, and this is a long overdue revamp. 

The other was the $130 million allocated to social investment initiatives. 'Social investment' is jargon for social support programmes targeted on 80:20 rule lines to those most in need, and typically delivered outside the traditional one-size-fits-all centralised social welfare spending channels. I wrote a bit abut it here, and I think it's a highly promising and progressive approach. The new Social Investment Fund "will use data and evidence to guide investment in effective, outcomes-focused social services. The Fund will invest in new programmes and in changes that strengthen existing arrangements". The Budget also said that "This initiative also provides departmental funding for the oversight and delivery of the Fund". This may just be a statement of the bleeding obvious, but I also very sincerely hope that it isn't code for the Wellington disease of excessive micromanagement of anything new or different.

*The fiscal impulse can be a bit of a heffalump trap to interpret. Suppose in Year 0 the government is in fiscal balance. In Year 1 it goes into deficit and buys 100 widgets, supporting widgetmakers. In Year 2, it is still in deficit but buys only 60 widgets. The fiscal impulse will show a reduction in the scale of fiscal support, from 100 to 60 widgets. At the same time, while less so, fiscal policy is still supportive: there are still 60 widgetmakers who benefit from the residual purchases. 

CLPINZ 2024

The 35th Annual Workshop of the Competition Law and Policy Institute of New Zealand (CLPINZ) was held last week at the Northern Club in Auckland, and - despite breaching the universally acknowledged convention that every Kiwi conference must at some point offer sausage rolls - was otherwise a well-attended and highly interesting day and a half. Hat tip to the organisers on the Board of CLPINZ and to the indispensable Charlotte Emery at Conference Innovators.

It led off with outgoing CLPINZ chair Anna Ryan introducing the keynote lecture from UCLA's John Asker (UCLA link, personal site, Cornerstone Research site), on 'The Competitive Effects of Information Sharing'. John reminded us that, since at least Hayek, we should think about markets and prices as an immense, efficient, decentralised, information-sharing mechanism for allocating resources, and the integrity of prices really matters for the outcome of the process. But there is a potential tension between the necessary information-sharing in the market, via price signalling, and the possibility of people using the information to collude and undermine the benefit of the free flow of signals. And it's not hard to see real life examples: he cited the case of a Perth-based web-based scheme which had aimed to show each petrol station's prices so that consumers could get the cheapest petrol, but which eventually degenerated into a mechanism enabling the petrol companies to coordinate prices. While some competitive effects can be reasonably obvious, John said that, unlike in areas like mergers where there are known analytical techniques, economics hasn't yet developed the full suite of forensic tools that would enable competition regulators to sort out the sheep from the goats. And when you do apply what tools are available, you don't always get unequivocal answers: his modelling (with coauthors) of timber 'stumpage' auctions, for example, where competitors had information about each others' timber inventories, came up with mixed results: "diagnosing how competition is impacted in non-price information sharing is complicated, and can lead to an outcome where reasonable people might disagree as to whether competition has been adversely impacted".

Keynote speaker John Asker, flanked by session chair Anna Ryan; Fionnghuala Cuncannon as commentator

Commentator Fionnghuala Cuncannon felt that ideally you would like to know when information sharing is harmful, and what is allowed or not under the Commerce Act, and hopefully the Venn diagram of the two ideas would overlap enough to give you a operational basis to act from. On the first point, she agreed with John that deciding on competitive harm is not settled, though in some cases you may well see instances where things look wrong, one example being the price following behaviour based on the 'main port price' that the Commerce Commission noticed in its petrol market study (see for example Figure X3 and paras X35-6). On the second she felt that the Act was "okayish" as it stood, but maybe we could have a think about buttressing it with the likes of the "concerted practices" provisions in s45(1)(c) of Australia's legislation.

Emma Ihaia, the chair of the session on 'Tikanga - is it relevant to Competition Law', introduced it by saying that tikanga is "an area largely unknown to many of us in the room", and that assessment certainly included me: by way of reference for people equally uninformed, Wikipedia says "Tikanga is a Māori term for Māori law, customary law, attitudes and principles, and also for the indigenous legal system which all iwi abided by prior to the colonisation of New Zealand". By the end, we were all a great deal better up with the state of play. Te Aopare Dewes said that use of tikanga is part of a transformational change in Aotearoa New Zealand, that it is now part of our common law post Ellis*, and that it will have relevance for the statutory interpretation of competition law. She also pointed to the Commerce Commission's use of tikanga concepts such as kaitiaki (stewardship, as for example on p13 of the Commission's latest annual report) and its awareness of Māori perspectives in its September 2023 Moana/Sanford merger decision**, although she reckoned the merger would likely have been cleared even without a tikanga lens. The Hon Justice Christian Whata (who headed the Law Commission study which produced the definitive report on the legal dimensions of tikanga) then took us through tikanga as custom, values, and law and talked about "the principles of engagement" which will need to apply as tikanga and European law (if I can call it that) learn to jog along together, including both relevance (tikanga won't affect every matter at issue) and reconciliation (there's no longer a presumption that European law prevails if push comes to shove). And finally Simon Peart took us through some hypothetical case studies the panel had devised to see how the two legal perspectives might or might not play nicely together. One of them (an agreement between otherwise competing Māori fishing companies to place a rāhui on fishing, to conserve the stock, which might amount to output restriction under the cartel provisions of the Commerce Act) didn't look especially problematic: it was fine from the tikanga side and (I'd guess) a strong candidate for authorisation from the Commission's side. The other (one Māori ski operator denying a competitor a licence to operate) was a good deal trickier to reconcile, and reminded us that not all of these issues are going to be a gentle stroll in the park.

The tikanga panel discuss some case studies: L-R, Te Aopare Dewes, Hon Justice Whata, Simon Peart, and session chair (and incoming CLPINZ vice chair) Emma Ihaia

Paul Comrie-Thomson chaired the next one, 'Wellington, we have a problem!', where barrister and incoming CLPINZ chair Ben Hamlin made a convincing case that exemptions from the Commerce Act for "the Crown" are both a legislative mess and poor public policy. Yes, s5 of the Commerce Act binds "the Crown is so far as the Crown engages in trade", but both "the Crown" and "engages in trade" are poorly defined. The Crown (however defined) also has extensive (though nor unfettered) scope to limit competition when not engaged in trade, and as a matter of good public policy it would be better if that scope was subject to some sort of overriding rationale or principle. Ben suggested that "bodies exercising public power should only be able to limit competition where expressly authorised by Parliament, it is reasonably necessary to achieve some public purpose, or it is permitted by a Commission authorisation", and he's drafted a Bill that would legislate along those lines (he's interested in feedback and assistance in polishing it up, so feel free to contact him). In these endeavours Ben was enthusiastically supported by the commentator, Dr Eric Crampton, who pointed to a range of examples of what he regarded as anti-competitive regulation (eg incumbent professionals being allowed to act as the gatekeepers assessing new entrants wanting to ply their trade) and which arise because "The Commerce Act provides broad exceptions for the Crown, particularly in relation to activities that affect commerce but are not considered to be in commerce".

The 2023 workshop had pioneered a new concept, the "Next Generation" session, where rising stars in the competition and regulation world get to strut their stuff, and it worked so well that it was back this year, again chaired by Will Taylor. Russell McVeagh senior solicitor Callum Dickson spoke on 'Privatisation in the space industry': one takeaway was that governments can be quite smart in organising procurement so that they're not at the mercy of a few suppliers or one, in this case suppliers of rocket launching services. Wynn Williams associate Rachael Monkhouse talked about 'The application of competition law to professional sports', where it's evident that sometimes sport gets carved-out treatment that to my eyes at least isn't always defensible. And Houston Kemp economist Nick Twort spoke about 'New analytical tools for understanding retail competition', and in particular the location data that can be cheaply hoovered up from your mobile phone and which can give improved empirical backing for regional market definition, where previously you and I might just have drawn a 5 kilometre circle around an outlet. All good stuff, and while on the topic of up and coming talent, the winner of the inaugural 2024 CLPINZ writing award was Russell McVeagh's Lydia Christensen, with her article, 'Competition Law and the Environment: Climate Change as a Non-Economic Consideration', where she argues that the Commission "has failed to genuinely engage with climate change factors as non-economic considerations that ought to be balanced against other factors".

Will Taylor (L) introduces the Next Gen speakers: L-R, Callum Dickson, Rachael Monkhouse, Nick Twort

Saturday morning brought us 'Settlement of IP disputes', chaired by Otago Professor Ed Willis and presented in case study format by barristers Earl Gray and John Land. Their argument was that since the the expansion of the definition of a cartel in the 2017 changes to the Commerce Act to specifically mention collusive output restriction, agreements in intellectual property disputes to stop producing things that infringe copyright or patents are at risk of being pinged as a cartel, and the risk is all the more real after the Moola*** case. Their solution is an amendment to the Act (which they have drafted and is ready to go) which would exempt good faith settlements in genuine disputes from the ambit of s30 cartel conduct. We need to be wary of anything that might open the door to the rather despicable 'pay for delay' sham patent settlements we've seen in overseas pharmaceutical markets, but that said, I can see the issue that confronts genuine settlements. Part of me wonders about the legal reasoning - how can it be an output restriction if the output allegedly restricted could never have been legally produced in the first place? - but when I asked the question, it didn't seem to cut any ice with my learned friends in the law. I also got the distinct impression that the Commission would be unlikely to bestir itself in cases where, on the facts, like in Earl and John's dairy packaging machinery example, there's clearly no collusive anti-competitive intent.

Finally we got to what Anna Ryan later described as "almost a second keynote address", and it was: Danielle Wood, chair of the Australian Productivity Commission, spoke on 'Competition Policy: Back in Fashion?', in a session chaired by her former colleague Hayden Green. In Australia, the answer to her question is, absolutely yes: they are pressing on with further reform (after two thorough previous goes, the 'Hilmer' and 'Harper' reviews), with their current rolling well-resourced Competition Review and its Expert Advisory Panel (of which Danielle is a member, as is John Asker) and which has already produced draft M&A legislation to address eg 'killer' and 'creeping' acquisitions. It is also tackling other good ideas, including addressing the epidemic of non-compete agreements which is anticompetitively blighting labour market mobility, and working on the next instalment of a National Competition Policy (programmes of reform agreed between the Federal and State governments) which might encompass things like easing parallel import restrictions. The Productivity Commission itself has further useful things on the go, such as liberalising occupational licencing. If you don't have access to the CLPINZ workshop materials, Danielle reprised her presentation in the latest of Treasury's guest lectures, and you'll find both a video and the slides here.

(L) Danielle Wood, chair of the Australian Productivity Commission, and (R) commentator Catherine Montague, manager of competition policy at MBIE

The commentator was Catherine Montague, manager of competition policy at MBIE, speaking in a personal capacity rather than presenting a ministry or government view. She suggested that there was potential impetus for reform in New Zealand, based on the current government's focus on productivity, the example of the Aussies, and the rark-up we got from the OECD in Chapter 3 of their latest economic survey of New Zealand (from the Executive Summary, "Insufficient competition is an important factor underpinning low productivity ... more can and should be done to further improve competition outcomes"). While nothing's yet settled, potential candidates for attention are mergers ('creeping' mergers, amending the SLC test to specify that it would include entrenching market power, and aligning with wherever Aussie gets to), non-competes and other restraints in the labour market, ensuring more attention is given to the competition effect of policy changes, and implementing a Consumer Data Right. 

Fingers crossed that something like this agenda happens, and sooner rather than later: recent experience has unfortunately been that we have been too timid in scope and process, much too slow, and decidedly belated. Either MBIE or our new Ministry for Regulation would be well advised to take a leaf from the Aussie textbook and get on with something similar to their latest Competition Review, and if we're interested in alignment with our friends across the ditch, a couple of cross-appointments (like the ones the ACCC and the Commerce Commission already operate) wouldn't go amiss, either.

*Ellis v R [2022] NZSC 114, [2022] 1 NZLR 239

**The final clearance decision doesn't seem to have been loaded into the Commission's online case register

*** Commerce Commission v Moola.co.nz Ltd [2021] NZHC 3423

Read the label carefully

This month's publication of the OECD's latest product market regulation indices came up with a few surprises (here are the key takeaways across all the countries surveyed, and the country note on New Zealand. Tragic regulation wonks might like to look at the questionnaire questions and the note on methodology).

Overall the OECD's overall measure of product measure regulation put New Zealand essentially at the OECD average. That's not too shabby, but arguably not good enough. As the OECD said, "Competitive product markets can boost productivity, employment, and living standards", and if you are a country which already has a productivity problem, you ideally would be better placed to be well down the more competitive end.

Fortunately, it's likely that New Zealand's performance, at least on some metrics, is actually better than the OECD statistics suggest at first glance.

We can unpick what's actually happening by looking at the sub-indices that make up the overall result (see chart below). To be fair, a lot of them show things as they indeed are. Most of us would have guessed our clearly pro-competitive positioning on avoiding retail price regulation: in fact it is currently the best out of the 43* countries surveyed . It is comparatively very easy for people in New Zealand  to set up a new business: if you're minded to jack in the corporate job and go out on your own, you'll have a company established in an afternoon. We have relatively low trade tariffs. At the other end of the scale it's been well known for a long time that we have one of the developed world's most restrictive approaches to foreign direct investment. 

But the survey also threw up some surprises and apparent anomalies, in particular our very poor rankings on 'Administrative and regulatory burden' and 'Licenses and permits'. Intuitively I wouldn't have picked either of those: ever had to deal with the bureaucracy in France? (They have the lovely word paperasserie to  describe the admin flimflam you have to go through). As for 'licences and permits', it didn't seem to me we have got anywhere near the barriers to entry that have proliferated overseas in recent years, where over-rigorous qualification requirements make entry difficult and not coincidentally protect incumbents. .

But look more closely and there's a bit of a labelling issue. Some of those very poor rankings don't really correspond to what they say on the tin. 'Licences and permits' doesn't actually mean, "relative to other countries, people have to get more permits and licences to do what they want rather than just getting on with it". It means, in the OECD's words, do "countries keep an inventory of all licences and regularly review it, adopt the 'silence is consent' principle, and tailor the length and complexity of licences to the risks inherent in the licensed activities". We probably ought to do those things, but that's a long way from having a thicket of licencing barriers to entry.

The low ranking on 'Administrative and regulatory burden' includes how we shape up on "the administrative requirements necessary to set up new enterprises ... with a focus on two specific legal forms: limited liability companies and personally owned enterprises". Given that we score well on ease of setting up a new business - 6th out of 43 as the chart shows - I'm frankly baffled how the overall measure comes out as badly as it does. 

In any event, when the person in the street thinks of "regulatory burden", they think of the whole nine yards of doing everything from your GST to paying your ACC levies and compliance of all sorts, not just how easy is it to get started in business. And if the OECD asked that question, I suspect that while we're not perfect - holiday leave payroll calculations, anyone? - we'd show up a lot better. The French labour code alone (never mind tax and everything else) runs to over 3,300 pages.

While the survey, in my view, shows us a bit more over-regulated than we really are, that doesn't mean we should sit on our hands and ignore the bits where we are genuinely off the pace when it comes to good but not over-intrusive product market regulation. The recently created Ministry of Regulation says that its "Regulatory reviews enable the Ministry to engage with people impacted by regulation and to identify how existing regulation could or should be improved" and that "We are currently developing a framework to assist in the selection and prioritisation of future sector reviews".

Why not junk the thinking about a framework and just pick off the issues the OECD has already identified for us?

* Some charts show rankings based on 43 OECD members, others show rankings based on 48 countries, i.e. the 43 OECD members plus five non-members.

Something will have to give

This week's online seminar from Treasury had its chief economics adviser Dominick Stephens recapping the economic and fiscal outlook as laid out in the Budget Economic and Fiscal Update (the 'BEFU').

It drew a big crowd - I counted close to 330 online, and 20 or 30 or so in person - and was a well-laid-out reprise of Treasury's thinking heading into the Budget. I could have done with an update on how data since the BEFU had or had not changed Treasury's thinking. I'd guess, given things like the really poor BusinessNZ/BNZ Performance of Services index for May which had appeared just before Dominick got to his feet, that there's now a bit more downside risk to the Budget forecasts for real activity.

What struck me most, though, were some of Dominick's concluding graphs, reproduced below. The first two come from He Tirohanga Mokopuna 2021 (The Treasury’s combined Statement on the Long-term Fiscal Position and Long-term Insights Briefing): a new Statement is due this year and likely will show the same broad picture. As the Statement said, back in 2021, 

"the gap between expenditure and revenue will grow significantly as a result of demographic change and historical trends, in the absence of any offsetting action by governments. This will cause net debt to increase rapidly as a share of GDP by 2060 ... Changing tax rates or restricting expenditure growth can help close the growing gap between revenue and expenditure. However, analysis in this Statement shows that one policy change by itself is unlikely to stabilise debt over the long run. This means that future governments will likely need to draw on multiple levers and consider trade-offs across different policy options in responding to our fiscal challenges".

Dominick also showed this chart, which illustrates one of the demographic drivers: as people age, they drift into the brackets that attract most government spending support. 

My opinion (just to make clear that it wasn't Dominick saying it) is that it's becoming obvious that at least some of the elements of the government's current fiscal strategy - especially the longer-term commitment to keep spending around 30% of GDP - are going to have to give way. And it's not just the demographics and the climate transition impacts that will eventually force public spending higher: it's also the large bill that's going to fall due to keep the country's infrastructure in good operative nick.

I've been struck in recent days by how many examples there are of investment spending falling short of what's needed. According to this report from Radio New Zealand,  the public health IT system has "more than 6000 apps; 1000 servers, almost half of which were so old they were "out-of-support"; a quarter of databases out-of-support and half on "extended" support; 1000 devices over a decade old". From this report in the Herald, we know that the Cook Strait ferries are approaching terminal clappedoutedness. It's been widely reported (for example here by 1News) that the aging Air Force plane supposed to take the Prime Minister to Japan broke down. And in Auckland the shiny new North Shore hospital has been sitting largely idle because the funds haven't been raised to pay for its operation (as reported for example here).

You'll notice the common theme, writ even larger again in sectors like the dilapidated Three Waters and the potholed roads: failure by successive governments, not just this one, to invest enough to keep capital equipment in good, reliable, up to date order. It's a classic example all round of Stephen Covey's adage that when you classify things that need to be done by whether they're urgent or not, and by whether they're important or not, it's the important but non-urgent stuff, like maintenance, that tends to get neglected.

The current fiscal strategy may limp on for a wee while yet: more equipment may be left to get even more obsolete, the waiting lists for medical procedures may be allowed to blow out even longer, the schools' teaching performance and physical premises can become even shabbier. But it's unsustainable. 

Budget 2024: tough choices deferred

There’s a big bunch of Budget documents handed out to the serried ranks of analysts packed into the pre-Budget ‘lock-up’ in Parliament’s Banqueting Hall, and the place I always like to start unpacking them is the economic forecasts: are they reasonable, or (in particular) are they flattering the prospects for the fiscal accounts? I’ve shown the main forecasts below, and they look more or less reasonable. I reckon the immediate economic outlook could be a bit weaker than allowed for – consumer spending, in particular, could turn out weaker (while there was a lot else also going on, Smith & McCaughey closing was just another indicator of households pulling back from spending), and we’ll have to wait and see whether the expected improvements in corporate profitability and national productivity growth materialise as anticipated. I have my reservations about the predicted track for the fiscal deficit (the ‘OBEGAL’ in the chart), as discussed later in this post, but as far as the economic forecasts go, the overall picture of difficult conditions now, ho-hum conditions in 2024-25, and rather better times beyond that, looks a commonsensical enough take.

A lot of attention will no doubt be given to the headline OBEGAL balance and in particular to the fact that it will not be back in surplus until the 2027-28 June year, a year later than previously anticipated. I don’t think this is a big issue, even if it continues an unhelpful recent tradition of pushing the “we’ll be in surplus” year out by a year, every year. I’m not sure an over-aggressive return to surplus would have made much sense in a weakish economic environment, and even at this slower-pace return to surplus we would end up with net government debt still at relatively low levels by the standard of other developed economies.

And in any event the fiscal balance, while it’s relevant to eventually stabilising government debt and later starting to pay it back, isn’t the best guide to one of the more important aspects of the Budget, namely whether it boosts or brakes the economy, and whether that boosting or braking helps or hinders the Reserve Bank’s job, which is also simultaneously trying to steer the near-term course of the economy. That’s better captured by the ‘fiscal impulse’ (shown below), and the good news is that the Treasury and the Reserve Bank are no longer so obviously at loggerheads. The previous government’s 1.7% boost to GDP from fiscal policy in 2023-24, which clearly complicated the Bank’s job, has been followed by a more or less neutral stance in the current June 2024-25 year, and by fiscal tightening in the years beyond that. The Reserve Bank’s job is now a bit easier. There is a wrinkle – the Reserve Bank may well have been expecting an outright tightening of fiscal policy over the coming year as opposed to the broad neutrality that’s now on the books – but I’ll settle for the two of them no longer being at odds.

The improved coordination of fiscal and monetary policy is a distinct plus in this Budget, as is the reversal of the stealth tax ‘bracket creep’ of recent years when income tax thresholds were not raised in line with inflation. As Nicola Willis pointed out in her Budget speech, “The median full-time wage and salary earner now earns $73,000 a year and is in the one of the highest tax brackets. A minimum wage worker can face a marginal tax rate of 30 per cent”. That needed fixing, and has been to a degree, though I would (perhaps unrealistically given the limited room for fiscal giveaways) have liked to see a commitment to keep on adjusting the thresholds in the future.

But there are also issues that bother me.

One is that there has clearly not been enough money allocated to keep government services going at their current levels or pay for new programmes. The Budget Economic and Fiscal Update (the ‘BEFU’) says (p37) that “the Government has $0.9 billion average per annum available to fund all new initiatives and other cost pressures at Budget 2025  … It is difficult to estimate how much of the Budget 2025 operating allowance will be needed to meet future cost pressures. However, in recent times a large portion of the funding allocated at Budgets has been used to meet cost pressures faced by existing services”. In other words, just paying the higher wage bills will likely eat up all (or more than all) of what’s budgeted.

And beyond 2025 it’s also likely there won’t be enough money to keep everything running unless something else gives. To be fair, the Budget fesses up: “The high-level analysis indicates that the future budget allowances are unlikely to be sufficient to cover future cost pressures on existing services. This means any shortfall and spending on new initiatives will need to be offset by expenditure savings, reprioritisation or revenue raising policy changes for each of the next three Budgets for the Government to manage within the signalled budget allowances. This will involve difficult choices and trade-offs for the Government which are likely to become harder over time”. The Fiscal Strategy Report says (p4) that “Managing within $2.4 billion [operating] allowances will therefore be challenging”: “challenging”, I’d suggest, is a euphemism for “impossible” (especially if you look at the long list of ‘Specific Fiscal Risks’, ‘Committed or Announced Intent that may have Fiscal Implications’ and ‘Time-limited Funding’ from p65 in the BEFU, and which will very likely put even further pressure on the public purse). Maybe there will indeed be enough savings or extra revenue found somewhere to make everything add up, but I for one wouldn’t be surprised to see the OBEGAL turn out worse than currently forecast, continuing the pattern of kicking the fiscal issues can down the road a bit further.

Another is the infrastructure spend. Yes, the Budget speech said that “In 2024, the Government is overseeing a record level of capital investment to deliver the infrastructure on which New Zealand’s growth depends. More than $68 billion is forecast to be spent on infrastructure by the Crown, Crown entities and KiwiRail over the next five years”. That’s great, and to be fair (just looking at transport) in recent years we’ve seen things like the Waikato Expressway, the extension of the Northern Motorway to Warkworth, and easier access to the airport via the Waterview tunnel which have eased previous bottleneck nightmares. But while $13.6 billion a year in new stuff is all good, you have to remember that depreciation (the cost of keeping the existing stuff going) is a sizeable $8.0-8.5 billion a year (see Note 10 to the government’s Forecast Financial Statements): the net addition of infrastructure is a rather less impressive $5.0-5.5 billion a year. I very much doubt if that’s enough given the existing infrastructure deficit and likely new commitments (eg funding the electrification of cars).

And finally, one of the biggest issues for successive government of all stripes has been the quality of outcomes from every public dollar spent: you only have to look at falling educational standards, or the unavailability of medical specialist advice within reasonable timeframes. The Budget is singing the right song – in the Budget speech, “the Government has a clear expectation that public agencies must strengthen their focus on delivering results. We have set clear targets to improve results in health, education, law and order, employment, housing and the environment, and we are focused on delivering them” – but I struggled to see the initiatives or new ways of working that would make the aspiration more credible.

Hemmed in

Yesterday's Budget Policy Statement, the BPS, as expected, showed that the government's fiscal options are heavily hemmed in. As Jenée Tibshraeny put it in the Herald, "even if economic growth hadn’t slowed as much as it has, it was always going to be difficult for the coalition Government to cut taxes, reduce public sector spending, ramp up the delivery of infrastructure and get the books back to surplus by 2026-27" (her earlier piece in reaction to last December's Half-Yearly Economic and Fiscal Update or HYEFU is worth a look, too).

There's also another factor in play. It's right for the BPS to say that "Tight fiscal policy in the near term will also support monetary policy to bring inflation within target, and maintain it there", but you wouldn't want to push your luck over-aggressively tightening fiscal policy when monetary policy has also tightened substantially. A combo of monetary and fiscal over-ease got us into too-high inflation territory, but we don't want to make the opposite mistake and have the combo of over-braking on both fronts. It's another reason why deferring the planned surplus a bit further into the future makes cyclical management sense.

Fiscal policy faces tough trade-offs, and they may even be a tad more hemmed-in again than the BPS expects. Treasury, in the placeholder forecast update it issued to go with the BPS, has already heavily revised down its estimate of GDP growth in the year to June '24, from 1.5% in the HYEFU to 0.1% now, but there's still downside risk to that estimate. Treasury said that "We expect pressure on household budgets from the erosion in real wages over the past few years, and the decline in household wealth from past falls in house prices, to contribute to declines in real consumption spending until the second half of 2024. On a per capita basis, consumer spending has fallen rapidly, and this scenario envisages that continuing over 2024". 

There's clearly a retail recession of some severity underway, and it could get worse. It's not just the real wage erosion and wealth effects that Treasury mentioned, it's also the hit from monetary policy (the peak pain of mortgage repricing hasn't quite been hit yet), the latest rise in petrol prices, and the imminent bill shock from next year's rates demands. Some ratepayers will be lucky to get away with a high-single-digit percentage, and a lot more will be looking down the barrel of a double digit increase somewhere in the teens. Walk around any shopping strip these days, and you'll find more store windows have gone dark: the chocolatier near us in Warkworth closed this month, and the jeweller flagged it away towards the end of last year. The outlook for the GST take on discretionary consumer spending is going to be distinctly soggy.

There's also downside risk to tax revenues from businesses and the self-employed. Treasury's already well aware of weaker than expected tax inflows: in the financial statement for the first seven months of the year, Treasury noted that "Corporate tax revenue and net other individuals’ tax revenue were $0.5 billion and $0.3 billion below forecast, driven by lower terminal tax revenue for corporate tax and reduced assessed and estimated taxable profits". On Stats NZ's figures, business operating profits in the December quarter were only 0.5% up on a year later, whereas provisional tax paid (as I understand the system) is based on the assumption that profits will have risen by 5%. Overpayment versus the actual outcome triggers tax refunds. There are tax boffins within Treasury who live and breathe this stuff, and maybe they're already onto the scale of it, but I do wonder if they're downbeat enough.

More positively, there was quite a lot to like about how the government intends to go about resolving the trade-offs they face. In particular I liked the look of "Improving public services by shifting spending to higher-value areas and focusing on results": there was a strong theme at this year's Waikato Economics Forum (as I reported here and here) that current programmes are not delivering the value they should, and that better designed, innovative and cost-effective 'social investment' initiatives need to get more support. And while, personally, I wouldn't be putting the highest priority on tax cuts, I can see the merit of one proposal, namely reversing the stealth tax of the past decade that happened as a result of not indexing tax rate thresholds for inflation.

If I was to push one priority over others in this forthcoming scrum, it would be infrastructure. Yes, it's clearly a fact that everyone can't have what they would ideally want from fiscal policy, given our starting point and the economic outlook, and no doubt us infrastructure enthusiasts will take our lumps, too. And I understand that we have currently limited capacity (what with low unemployment and other constraints) to make a big immediate splurge on fixing our infrastructure deficit. 

But there has to be a more serious attempt to fix our infrastructure than we've managed so far. As this report by Sense Partners for the Infrastructure Commission showed, we're already $110 billion odd short of what we need, and if we're not careful that could blow out to some $230 billion (in today's money) over the next thirty years. And quite apart from the new stuff that's needed, we're not even spending enough to keep the existing stuff in good working nick: this report by the Infrastructure Commission found that "renewal spending is below depreciation for state highways, local roads, water supply, wastewater and stormwater infrastructure, and gas distribution infrastructure".

The BPS talked about "Developing a long-term, sustainable pipeline of infrastructure investments"; it said that the government "will top up the multi-year capital allowance (MYCA) by up to $7 billion, with the final number to be confirmed in the Budget"; debt will be used inter alia "to fund high quality investments that provide benefits to New Zealand over time, including those that increase the productive capacity of the economy"; and the government will be "unlocking new funding and financing models to catalyse private investment". That's all good on paper: I just hope that between now and the Budget on May 30, when the decisions on competing claims get thrashed out, we don't do what we've always done, and kick the infrastructure can even further down the increasingly potholed road.

Inflation and the output gap

Yesterday's Monetary Policy Statement from the Reserve Bank said (eg at p ii) that "a sustained decline in capacity pressures in the New Zealand economy is required to ensure that headline inflation returns to the 1 to 3 percent target": the economy needs to move from a hothouse above-capacity state (a 'positive output gap' with people trying to chase after scarce resources, driving up their prices) to a below-full-capacity state (a 'negative output gap', where resources are more available and less in demand).

Here's what the relationship that's being relied on has looked like over the past twenty odd years. It shows how the output gap has affected domestically-generated ('non-tradables') inflation. The numbers come from the underlying data supporting the Statement, which the RBNZ helpfully supplies as a spreadsheet. I've taken the impact of the 2010 GST increase out of the inflation data. I've also advanced the output gap by three quarters, which looks to be a good stab (tested by a couple of quick regressions) at the lag between the hot or cold state of the economy and subsequent heating up or cooling down of inflationary pressures.

It's a reasonably robust relationship (a simple regression had an R squared of 0.54) but it's obviously not infallible. In the mid 2000s for example the economy ran quite hot but non-tradables inflation never picked up, and the years immediately before Covid also saw the economy in reasonably good fettle without provoking the inflation genie. But that said, and especially when there are really large moves (the post GFC slump, the post-Covid fiscal and monetary policy fuelled boom), it holds up pretty well.

Two things struck me when I looked at the chart. One is that the RBNZ is projecting a large move in the output gap by historical standards. Peak to trough, the GFC setback amounted to a 5.8% of GDP swing, from 2.8% above capacity to 3.0% below it. The projected move in coming years is almost as large: a 5.5% swing from 3.9% above full capacity to 1.6% below. Maybe that will indeed happen as monetary policy continues to bite, fiscal policy very likely turns less supportive and strong net immigration swells the available labour supply. I wouldn't say it's an implausibly big or improbable ask to see a turnaround of that order, but getting on top of inflation is reliant on a pretty large change in economic conditions coming to hand.

The other thing that struck me is that if the output gap does indeed evolve as the RB expects, non-tradables inflation might even drop more than projected. My little regression says that if we get down to a negative output gap of -1.6%, non-tradable inflation (with a three quarter lag) would get down to 2.3%, a bit lower than the 3.0% the RBNZ anticipates. Or put it another way: the 3% or so non-tradables inflation the Bank expects is the sort of outcome you'd get if the economy was roughly at a Goldilocks zero output gap, neither too hot nor too cold. If we actually stay below that level (as the Bank thinks), non-tradables inflation could well recede more than currently anticipated.

The New Zealand Economic Forum - Day 2

We kicked off Day 2 with a keynote speech, "The monetary policy remit and two percent inflation", by Adrian Orr, governor of the Reserve Bank, delivered online (full text here or watch the video here) after Adrian came down with a late lurgy (a pity, as I'd looked forward to chewing the fat about the forthcoming NRL season with my fellow Warriors tragic).

Adrian Orr with one of his slides, showing that core inflation as it actually transpired over 2020-22 was stronger than the lower real-time estimates available when decisions needed to be made (with Waikato's Prof Matt Bolger as moderator)

Takeaways? Some sympathy for the RBNZ's (and other central banks') challenges over the past few years: Covid, where Adrian reasonably asked, which mistake did you most want to avoid in the high-uncertainty crisis, and the answer was too-tough policy that might aggravate a downturn, hence the almost universal let-it-rip of both fiscal and monetary policy; the Team Transitory/Team Core debate; the interruption to normalisation from the Auckland lockdown; the Ukraine; and a recent rise in household inflation expectations. 

Expectations - which are interlinked with people's trust in the competence of a central bank (what us older folks used to call 'credibility') - look high on the bank's agenda. I noted in the speech that while inflation has come down, "tackling the tail end of these persistent inflation pressures in the domestic economy remains key to achieving 2 percent inflation. Just how persistent these pressures might be depends on how factors, such as capacity pressures and inflation expectations, evolve going forward". Adrian was giving nothing away about the next monetary policy decision (February 28) but if I were in the room I'd be looking at the latest annual non-tradable inflation rate (5.9%) and wondering if those capacity pressures and expectations levels needed a further knock on the head.

Onwards to fiscal policy, first with a keynote from Caralee McLiesh, Secretary to the Treasury, followed by a panel discussion on 'Treasury and the state of the books'.

Caralee's speech doesn't appear to be up on the Treasury website, but you can get the gist of it from the excellent 'Economic and Fiscal Context Slide Pack' which was part of Treasury's Briefing to the Incoming Minister of Finance. A key point was that our fiscal deficit is structural, not cyclical: as Caralee said, it tends to be easy to loosen fiscal policy in a downturn, and a lot harder to wind back the spend in better times, and we've now reached the point where belated policy tightening is needed (we'd got the same message from Nicola Willis the previous day). "Difficult distributional decisions lie ahead": quite.

Treasury Secretary Caralee McLiesh speaking to our rise in net public debt

The 'State of the books' panel - Craig Renney from the CTU, Eric Crampton from the New Zealand Initiative, Sarah Hogan from the New Zealand Institute of Economic Research - may have been intended to have been a battle of "duelling economists", as one person put it, but it turned out to be a lovefest of harmony and mutual understanding which coalesced around the theme of the importance of getting the best value for money from the public spend. 

As Craig said, there's nothing inherently "right-wing" in demanding value for money and nothing inherently "left-wing" in spending the right amount. Sarah pointed to health as one area where we are not getting value for money: Pharmac (she said) may take its lumps from its critics, but on the other hand it is a rare example in the sector when it comes to revealing its prioritisation. Other areas are either not transparent, or may not even prioritise in the first place. Eric would like us to retreat from the post-Covid spending bloat, perhaps to the same share of GDP that the Wellbeing Budget of 2019 represented (core crown spending of 29.1% of GDP, compared to the 33.0% expected for 2023-24 in last year's Budget forecasts): one reason was that people would be less likely to sign up to future rainy day spendups if they see previous ones sitting there unpaid for. And all the panellists were very keen on a really rigorous framework of prioritisation and evaluation: as Craig put it, "Think hard, and then think hard again".

The "duelling economists": Craig Renney, Eric Crampton, Sarah Hogan, with (on left) panel moderator Waikato's Prof Anna Strutt

Then we got a panel on 'Infrastructure: Unclogging the arteries', a topic close to my and I'd guess every other New Zealander's heart, given the increasingly shabby state of virtually all the infrastructure we use, from hospitals, classrooms, and roads to those infamous three waters. I drove down to Hamilton from outside Warkworth. The good news is that Warkworth to the approaches to the Harbour Bridge went fine (thanks to the new Puhoi motorway extension, even if it took forever to build), and Drury to Hamilton was fine (thanks to the new Waikato Expressway, also remarkably protracted). The bad news was that the intervening Harbour Bridge to Drury stretch remains an absolute nightmare, undoing a fair amount of the Puhoi/Waikato benefits, and the throttleneck looks like staying that way for some considerable time. There's a huge deferred bill looming: one speaker mentioned the Infrastructure Commission's estimate that we will need to spend $30 billion a year for the next 30 years.

Alison Andrew, CEO at Transpower, told us that while the current transmission grid is in good shape, (a) most of it was built in the '50s and '60s and is getting to its use-by and (b) there's an opportunity to green the country through electrification, but we will need 22 gigawatts of generation (and associated transmission) compared to today's 10 gigawatts. She didn't say it, but I personally wondered why the Commerce Commission regulates Transpower in 4-5 year bites, rather than over a longer-term horizon. Chris Joblin, CEO at Tainui Group Holdings, said it wasn't so much unclogging the arteries that's needed, but more like a double or triple bypass after being on the fags since the '70s: we just haven't being looking after our infrastructural health. And when we do bestir ourselves,  the consenting takes forever: he mentioned that it took 17 years to get Tainui's inland port at Ruakura (just beside Waikato University, as it happens) up and running. Among the issues: we look for perfection, which causes procrastination, and we load too many objectives onto projects, blowing out the costs and causing further rethinks. And Nick Leggett, CEO at Infrastructure New Zealand, agreed that we need to get our project management process right: we can occasionally rise to the occasion but mostly we're bad at it.

In passing, if the planning and project mismanagement omnishambles gets your goat, too, you'll like Daryl McLauchlan's piece for Democracy Project, 'Unjarndycing the State'. And if you'd like a piece on how we might do better, here's one I prepared earlier for Acuity magazine, 'Getting results'.

Life's too short, so I'll just pass briefly over the final two sessions. 'Climate & Weather: So what happens if we don't curb emissions?': answer, bad stuff,  and for some of the same reasons that our infrastructure record is so poor. As Sir Brian Roche said, we make a virtue of recovery from disasters, but we don't provide for preparedness in the first place. If 'value for money' was a recurring theme of the Forum, 'dynamic inefficiency', not investing enough to keep the show on the road, ran it a close second.

And in 'Fintech Futures: The end of cash?', no, cash is not dead, with the RBNZ's Karen Silk reminding us of why we still use it (full and final settlement, in privacy, plus benefits when, say post-Gabrielle, the ATMs and EFTPOS go down). And on the fintech side, we've had some successful financial innovation - we heard from Brooke Roberts, co-CEO of one of the successes, Sharesies - and while Brooke hoped that we will eventually have a global fintech come out of New Zealand, it's generally not as easy to get things up and running as it is in, say, Australia. Shane Marsh, cofounder of DOSH, also wondered about us falling behind. In my mind, I've always thought of New Zealand as a digitally advanced place - we were using EFTPOS for everything when our friends and rellies in Ireland, the UK or the US were still writing cheques - but the world's moved on, and we haven't. In Shane's view, our payments landscape is now well behind the rest of the world and even behind some of the 'developing' world .

Matt Bolger, Pro Vice-Chancellor of the Waikato Management School, sent us on our way with an uplifting message. While it's tempting to think that today's rate of change is unprecedented, Matt said we shouldn't get so up ourselves: how do we compare, really, with the generations who went through the Great War, the Depression, fascism and communism, and World War Two? And despite our current inability to plan properly for tomorrow's challenges, maybe he's right that we shouldn't get overwhelmed, and we should stay optimistic. It would be nice to think that New Zealand Economic Forum 2025 will be able to document that we're getting more of a grip on the issues that face us.